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Ireland ETF to Thrive on Weak Euro

This young, small exchange-traded fund might be worth your investigation.

One of the stories to dominate the financial headlines in recent months has been the euro's sharp decline against rival currencies, most notably the U.S. dollar. As worries about the ability of cash-strapped governments to draft and implement harsh austerity measures have intensified, investors have fled euro-denominated assets and sought out markets deemed to be less risky and less vulnerable to a sovereign debt crisis. With eurozone interest rates expected to remain near zero for the foreseeable future, the outlook for the currency isn't so bright; some analysts see a further plunge in the forecast (see ETF Plays On Euro/Dollar Parity).

A weak currency often carries with it a negative connotation; unfavorable exchange rates can dent national pride and make imported goods (or overseas trips) increasingly expensive. But there is an upside to a weak currency as well, as any investor who has followed the drama surrounding Beijing's yuan policy can attest. A country's exports become more attractive to international consumers, potentially giving the national economy a jolt (see Surprise Winners From The Yuan's New Flexibility).

So even without rose-colored glasses, a weak euro can be seen as a positive for eurozone economies, some of which will benefit more than others. "The weakening euro may help the Germans sell cars, the French sell pharmaceuticals, and the Greeks sell island vacations," writes Neil Shah. "But Ireland, above all others, will be the biggest beneficiary of the euro's recent fall."

Ireland's massive export market -- overseas sales account for more than half of GDP -- could benefit tremendously from a prolonged depression of the eurozone's common currency. Although many exports are shipped to countries within the EMU, big slugs are also sent to the U.S. and U.K., two countries that have seen their currency appreciate rapidly against the euro over the last six months.

Many investors have been looking ahead to today -- when Ireland will release first-quarter GDP figures -- to see if any economic gains have materialized as a result of the weakening euro.

Greener pastures ahead?In some senses, Ireland is years ahead of the rest of Europe. The country implemented harsh austerity measures nearly two years ago, hiking taxes and slashing government expenditures in an effort to address mounting debt balances. Many of the continent's larger economies, including a relatively stable Germany, are just now beginning to take the bitter fiscal medicine the Irish have long since choked down.

Significant hurdles remain, but more and more investors are taking an optimistic look at the Emerald Isle's economy. Thanks to the government's fiscal foresight and the tailwinds of a battered euro, Ireland's economy is expected to deliver slight positive growth in 2010, a significant improvement from previous forecasts that had called for yet another GDP contraction. The outlook in many other euro zone countries is more grim, and there are indications that the region's recovery is stalling (see The Case for an Ireland ETF).

Ireland ETF in focusFor U.S. investors looking to gain exposure to the Irish economy, perhaps the best option is the iSharesMSCI Ireland Capped Investable Market Index Fund(NYSE: EIRL). This ETF tracks an index made up of the largest and most liquid stocks listed on Irish stock exchanges, currently consisting of about 23 individual holdings. The largest of these is CRH PLC, a multi-national building materials firm that operates in 35 countries around the globe and makes up nearly a quarter of EIRL's total assets.

From a sector perspective, EIRL is heaviest in materials (23%, all of which is attributable to CRH) and industrials (20%), with significant allocations also given to consumer staples, health care, and financials. Unlike many international equity ETFs, the sector spectrum isn't quite complete; technologies, energy, and utilities aren't represented.

EIRL has a relatively short history; it was launched in early May. With only 150,000 shares outstanding, EIRL is one of the smallest ETFs on the market by assets, so investors interested in this fund would be wise to use limit orders when establishing or exiting positions.

Disclosure: No positions at time of writing.

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